Friday, 8 January 2010

Decriminalising would-be Mpombos...

I have been hesitating to weigh in on the Mpombo – Findlay cheque bouncing saga. In the end I found it hard to resist because yet again the deeper problem appears to have escaped general debate : we are a people addicted to poor laws often to our detriment. We have laws for everything, that only politicians and misguided bureaucrats understand the rationale behind them. The latest to come to the forefront is the criminalisation of cheque bouncers. Caleb Fundanga neatly reminded us of the danger :

”The total volume of cheques returned unpaid on account of insufficiently funded accounts fell by 8% to 5,117 cheques while the value decreased by 28% to K41.30 billion. This is an encouraging trend, which the Bank would like to see continue. The public is reminded that bouncing of cheques is a criminal offence under the National Payment System Act. Members of public should ensure that they have sufficiently funded accounts whenever they issue cheques to avoid facing criminal charges”.

Any person who wilfully, dishonestly or with intent to defraud issues a cheque on an insufficiently funded account or causes to be issued a cheque to be drawn on that account and which cheque when it is presented for payment is dishonoured, commits an offence and is liable on conviction to a fine not exceeding one hundred thousand penalty units or to imprisonment for a term not exceeding two years, or to both.

It’s difficult to fathom how and why such a draconian law is on our statute books without minimal general opposition. To think it was drafted as recent as 2007! Do these MPs read before they sign things into law? I can see why any normal human being would consider it wrong for people to systematically and intentionally bounce cheques, but I don’t see why that should translate in a criminal penalty. In my view criminal penalties are there for offenses seen as injurious to the general population or to the State, including some that cause serious loss or damage to individuals. This is why they often result in custodial sentences. Bouncing a cheque is not in my view a crime against the state, nor are there serious economic foundations for treating it as a social problem, let alone a criminal or custodial offence. I reach this conclusion based on three reasons.

First, the social negatives (or “market failures”) are not obvious. On efficiency grounds alone, government intervention is warranted if bouncing a cheque in some way imposes costs on society that are not borne by the players involved in the transaction. It follows that if X issues Y a cheque dishonestly, and Y bears the costs (bank charges, lost income, etc), there’s no need for government to intervene. That Y has been duped by X is no crime against other members of society (represented by government), unless we believe there was systematic failures that prevented Y from properly taking the possibility of being duped into account when agreeing the deal with X. That is to say we regard the exchange between X and Y as sub-optimal. For example, we might hold that Y is insane and not capable of asking for the payment to be delivered in cash. But as long as Y made a perfectly rational and informed decision, the fact that it turned out to be wrong is no reason for government to intervene. In many cases cheques are accepted on trust, but where such trust does not exist people prefer more certain transactions, and so it should be! There's a good reason why supermarkets don't take a cheque without a cheque guarantee card! It is not government’s job to constantly police that Y gets the correct cheques from X. The point of course is that whether Y’s judgement is poor or not is irrelevant, what matters is that this is a deal between two private and rational individuals and therefore all the costs borne by either side are “internalised”.

Some might say, well that sounds fine but what about cost on the courts if Y had to be forced to pursue X to recover the debt? Surely, by having this draconian law we are ensuring such eventualities never take place – a sort of deterrent effect? That is true, but we have to remember that this is different point for a number of reasons. For one thing, the underlying questions raised is predicated on 100% deterrence. As Fundanga helpfully illustrates, we have many cases of these breaches. So in most cases what we have is more costs on the system with minimal deterrence. Indeed under the current minimal deterrence Y can always sue X with or without the criminal prosecution. So having the criminal sanction does not prevent the ensuing criminal justice costs. The more crucial point is that the question rightly focuses on the importance of the deterrent effect in reducing the costs on the justice system (e.g. court congestion from subsequent debt pursuits etc). If these are worthy goals then its better to take a more holistic approach to easing capacity constraints and not use specific laws as the way to achieve that. A piece meal approach is actually likely to have the opposite effect – far from easing criminal justice constraints we may add on top strain to our police officers as they chase Mr X rather than fighting real crime.

This brings us to the second objection: criminalisation of cheque bouncers has significant costs on society. Criminalisation is not without costs. I have already noted that there are likely to be significant costs to our justice system in form of costs to the police, possible legal aid provision for defendants, courts and other aspects. The worrying prospect of course is the potential for two year imprisonment and the likely costs that would have on prison population. But it is the costs to society for someone having gone through the criminal fraternity that we should worry about. It is well know that often jail is simply a training ground for later re-offending. It therefore begs the question why any responsible person would even contemplate sending people to jail in the first place for bouncing a cheque.

Efficiency issues aside, the measure is also misguided on equity grounds. It is hard to dismiss that the poorest members of society are the ones who tend to issue bounced cheques. It is they that often struggle financially as they fend for themselves. The poor also suffer because they have weak legal representation. As we will discuss more in future posts on “Rethinking Justice”, legal aid provision is insufficiently funded by government (and NGOs) and many of our poorest do not get high quality legal presentation, if at all. There’s significant likelihood that many innocent poor people are being sent to our crowded jails based on foolish laws and crimes they have not committed. This is a triple injustice : poor, foolish laws and incorrectly convicted.

The time has come for those who are proposing new laws to start thinking carefully about the various trade-offs involved. Not every small issue requires a criminal offence. Poorly thought out laws without any analytical basis can only cripple our capacity constrained justice system. And for goodness sake don't just implement laws because you have seen a similar law in India*! Think! We’ll return to these issues in due course.

*That I use India has nothing to do with my frustration that the recent visit by Indian VP piled more debt on our necks. It is purely because India has a similar law.

Sometimes I wonder whether it is even worth bothering about Zambia. It is certainly a lost cause. A country that has worked itself from nothing to a state of extreme poverty in 45 years is not worth bothering about. Zambia the fifth world of the Third world, certainly.

Cho,I always find your posts to be very refreshing but I find this argument quite interesting. Are you saying then fraud if between two people with the government not suffering any injury should not be treated as a criminal offence?A bouncing check if intended is a manner of getting unfair advantage over a business colleague or client so as to obtain services or goods and that in my opinion is criminal.The next time some one robs you(the state not suffering injury)will there be need to criminalize this act?Don't you think by decriminalizing such acts, the social fabric is at threat as people will not be held accountable or if held accountable due to lack of punitive measures, people will not be necessarily be deterred from taking such actions with impunity? In the case of Mpombo, he claims to have informed Findlay of the insufficient funds in his account thus criminalizing him seems preposterous and surely an underhand method by RB and his cronies.

"Are you saying then fraud if between two people with the government not suffering any injury should not be treated as a criminal offence?"

I think my view is three-fold :

1. Criminal penalties are there for offences seen as injurious to the general population or to the State, including some that cause serious loss or damage to individuals. If fraud seriously causes serious damage to a person then it should POTENTIALLY be seen as a criminal offence. Also fraud can be considered to have wider costs on society because it may SYSTEMATICALLY undermine the entire financial system. But we know that is not the case with cheques because many countries don't criminalise bouncing cheques and the system work.

2. The other point is that I hold that government should step in when there are cognitive or "rationality" problems between parties. For example, if you genuinely where not able to assess and account for the fact that I would defraud you, then of course government should step in. As I said, I don't think that is the case with cheques. You always have an alternative to ask for cash. The other point is that we take cheques from people we trust or repeated interact with. This means that we make fully informed decisions and account for being defrauded.

3. BUT, the crucial point is that even if fraud was bad it does not mean it should be a criminal offence. The reason is that by making it criminal we may be imposing huge and unbearable costs on ourselves. This is why when laws are made we should always weigh the trades-off. The Ministry of Justice needs economists who can help them think new legislation along the lines I propose. Everything has trade-offs.

Check/cheque bouncing is a criminal offense in a number of countries around the world. Some criminalize second or third time offenses, but in many countries a first-time offense is treated as criminal.

The fact of the matter is, someone wrote a cheque, knowing that it was illegal to write a cheque having insufficient funds, as a form of payment. Plain and simple.

I find it surprising that equity is an argument -- poorer people have less money, and are therefore more likely to default on cheques, therefore criminalisation of cheque bouncing affects poor people more. This is a unidimensional analysis! No one, rich or poor, that willfully enters into a transaction and has insufficient funds to do so, should be spared.

Incidentally, my colleague points out that very few poor people even have a bank account, so your argument doesn't need apply.

The argument about many innocents being sent to jail is also ridiculous. Would you happen to know how many people have gone to jail in Zambia because their cheque bounced? I would bet that the number is almost certainly close to zero.

The argument about straining the policing system is also unjustified. Financial fraud, which is exactly what cheque bouncing is, must be dealt with, in order to protect the integrity of the financial system. Again, I wonder how many police officers are busy on the streets of Lusaka and Ndola chasing cheque bouncers.

I doubt there are any huge and unbearable costs associated with this particular law. Fraud is a crime, and so a fraudulent offense is a criminal one.

Please accept this as constructive criticism and not personal. This blog has become a pre-eminent destination for engaging discussions on economics in Zambia.

The famous quote from Spiderman, "with great power comes great responsibility". This blog has a responsibility to be balanced, and it is far from that!

”Check/cheque bouncing is a criminal offense in a number of countries around the world. Some criminalize second or third time offenses, but in many countries a first-time offense is treated as criminal.”

There’s a phrase we cherish on this blog – Sakism: the misguided thinking advanced by certain politicians that just because others are doing it, we should also do the same thing. Other people's actions are the best reasons for your own actions.

”The fact of the matter is, someone wrote a cheque, knowing that it was illegal to write a cheque having insufficient funds, as a form of payment. Plain and simple.”

You are concerned with applying the letter of the law as it stands. I respect that, but I am concerned with whether the status quo is ideal.

”I find it surprising that equity is an argument -- poorer people have less money, and are therefore more likely to default on cheques, therefore criminalisation of cheque bouncing affects poor people more. This is a unidimensional analysis! No one, rich or poor, that willfully enters into a transaction and has insufficient funds to do so, should be spared.”

Undoubtedly many would hold that position, that justice correctly applied should not discriminate on equity – in fact as a Wolterstorffian who believes that rights are grounded in human worth, I suspect my own view of justice would inherently reject that.

However, that assessment ignores an important rider I inserted in the text – “There’s significant likelihood that many innocent poor people are being sent to our crowded jails based on foolish laws and crimes they have not committed. This is a triple injustice : poor, foolish laws and incorrectly convicted ”. It is the multiplicative effect on the poor that concerns me most – although I agree that I am sort of trading off justice, Wolterstorffian construed, with a sort of reverse efficiency argument . There’s also of course the marginal utility of income and capability arguments which I left out because I try and keep the blog focused and where possible do without economic jargon.

”Incidentally, my colleague points out that very few poor people even have a bank account, so your argument doesn't need apply”.

Please remind your colleague that the effects of this act are not just today, but tomorrow. We must live our lives forward. You will see on this website, I am preoccupied with the future. Let us think constantly of tomorrow. Laws made for today’s conditions only are not optimal. So yeah, my “appraisal period” is greater than 1. As it turns out many poor people have bank accounts. Your colleague perhaps has an old grand mother in Mpweto in mind. I speak of the poor being the majority of Zambians.

”The argument about many innocents being sent to jail is also ridiculous. Would you happen to know how many people have gone to jail in Zambia because their cheque bounced? I would bet that the number is almost certainly close to zero.”

I have no statistics on this, but I would say its minimal because enforcement has just began. The act was agreed in 2007 and enforcement started in 2008. But again that misses the point. The future, my friend, the future. Think future not only today.

”The argument about straining the policing system is also unjustified. Financial fraud, which is exactly what cheque bouncing is, must be dealt with, in order to protect the integrity of the financial system.”

Lol! Really? I think I have addressed this in the main post as well as my response to Kayabwe.

” Fraud is a crime, and so a fraudulent offense is a criminal one.”

This confuses the legal and moral definitions of crime. Morality is an objective transcendent truth. The legal definition of crime is socially conferred. It can vary from place to place. From the legal and economic standpoint, its therefore not a crime until we as society say it is. My argument is that in reaching that point we should examine trade-offs.

”Please accept this as constructive criticism and not personal. This blog has become a pre-eminent destination for engaging discussions on economics in Zambia. The famous quote from Spiderman, "with great power comes great responsibility". This blog has a responsibility to be balanced, and it is far from that!”

I welcome not only criticism but opposing articles. Infact I have an open door policy for people to write guest blogs – see contact page. Any time you wish to set out why you think this blog has gone off the rails, please write an article that will help present balance. I will publish it.

I don’t pretend that I have no world views and everything I write is neutral. No one can do that. I have strong beliefs about things and I communicate them. Neutrality is an illusion. As Cornelius Van Til said “all thinking is circular”. We all have priors.

What I do try and do is give an open door policy for people to comment, share their thoughts and write articles. In a way I need people like you to help this website retain balance! The door is open...what say ye?

Just get rid of cheques! I'm not sure about Zambia, but the electronic systems in place these days renders cheques optional for the vast majority of people.

"3. BUT, the crucial point is that even if fraud was bad it does not mean it should be a criminal offence. The reason is that by making it criminal we may be imposing huge and unbearable costs on ourselves. This is why when laws are made we should always weigh the trades-off.

I think this is a fundamental point. I would also be interested in statics from various other countries to compare the effects of criminalisation vs. decriminalisation of the same bouncing of cheques.

As I said above, the ultimate solution is to get rid of cheques altogether! Have a look at this:

"Many experts believe that mobile phones - already used to transfer money in countries with poor infrastructure in Africa - could be used. So you could send a text message on a phone that would transfer money into your plumber or builder’s account."

Indeed, mobile payment technology has arrived and will revolutionalise transactions in the informal sector especially. It has actually taken off more in Africa than in developed countries! Who would have thought?? I actually blogged on it a while back saying developed countries were looking to Africa for inspiration on mobile usage, because the device had flourished there and (initially) reached far greater penetration levels than anywhere in the world. Africa has delivered on the part of mobile payments.

However, much as technology has or is set to enhance financial transactions, it has it's own problems when it comes to fraud. With technology changing so fast, it not only requires adequate ICT policies and regulations, but also skilled manpower in areas such as law enforcement in order to keep up with fraudsters.

In the UK for example where they have pretty much adequate ICT policies, it so happens that victims of identity theft or credit-card fraud are left on their own to sort it out with their banks. The police don't want to know about it, or even if they were told about it they could do little about it because they haven't got the resources to.

Zambian law is not usually well thought out Companies Act a case in point but what usually do is simply copy the laws of other countries.

Unfortunately this more often that not means that the people defending the legislation do not know why it exists.

As draconian as this may seem to Cho, "Cheque kiting is illegal in most countries. In the United States, the banking industry is heavily regulated and even insured by the U.S. government. According to the United States Department of Justice, cheque kiting can be prosecuted under several existing laws including those against bank fraud (18 U.S.C. § 1344), misapplication (18 U.S.C. § 656), or required entries (18 U.S.C. § 1005). It can draw a fine of up to $1,000,000.00, imprisonment for up to 30 years, or both, and many first-time offenders with no criminal background have received stiff sentences. In addition to the federal remedies, state law often provides for alternate civil and criminal consequences.

Although the United States prosecutes some paper hangers under federal law, most uttering of a bad cheque in the United States is prosecuted as a state offense."

This practice is common in Zambia and if you know someone in a bank kiting is very easy to collect on a cheque that is not cleared.

The issue is that "kiting" is not referred to in the Zambian law and when they were "copying" the legislation my bet is few understood the intention.

Mobile banking outside of Lusaka, Kitwe and Ndola is still very far from becoming a reality in Zambia. Network coverage remains poor in many areas. Quality of service is also poor in many areas.

Even in the USA that has far more advanced mobile networks only 7% of consumers made purchases through the mobile phones and 70% of those purchases were from either Ebay.com or Amazon.com.

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